Japan’s Deflation Mindset Could Be Contagious

The biggest Japanese popsicle company, Akagi Nyugyo(Co) has decided to raise the prices of it’s best selling product for the first time in 25 years, in April 2016. The company felt the need to apologize to their customers and they decided to ran a 60-second commercial, which showed the company’s chairman, backed by a bunch of dark-suited workers, all bowing, apologizing to their consumers. After 3 years, the main manager who came up with this commercial idea is still feeling guilty. “It’s not like people have any extra spending money,” Fumio Hagiwara says.

Japan is the only developed economy that experiences drop in wages every year. Since 1996, the inflation adjusted wages have fallen by approximately 13 percent. The biggest reason for the decrease in wages is due to the shrinking market that causes business to be unwilling to raise prices, or make investments. The downward spiral has led to a “deflationary mindset” that Bank of Japan Governor Haruhiko Kuroda blames for preventing him from successfully reviving the economy.

The “deflationary mindset” has become so deeply ingrained in the Japanese, that an extremely rare rise in the most recent round of seasonal bonuses paid to workers, ended up increasing the savings instead of a triggering a shopping spree. “It’s not surprising when people have had negative wages for so long,” says Michael Causton, an expert on Japanese spending patterns and co-founder of research firm JapanConsuming. After experiencing six recessions in 30 years, figuring out ways to save money has turned into a national obsession. Some ingenious saver became minor stars, as they share how they save money. Miwa Komatsu, creates of a Japanese TV talk show, explained how she managed to sock away $100,000 over 10 years, despite making only $1,300 a month as an office worker and single mother of 4 children.“It’s a game to me,” the 49-year-old says. “I still enjoy doing it even though money isn’t that tight anymore.”

Economist Andrea Ferrero, at the University of Oxford, was one of the first one to argue that Japan’s deflation is linked to something more than just the mindset of Japanese people. More importantly, it’s linked to the changes in demographics.In a 2014 paper, “What Explains Japan’s Persistent Deflation?,” he and co-author Carlos Carvalho showed that aging populations exert a drag on interest rates and, by extension, the economic growth―which is partly why Japan was so slow to recover after the bubbles burst in the early 1990s. The increase in the number of pensioners, causes decreasing in the average spendings, as retirees who live on savings and minimum amount of pensions have a very tight budgets.

Deflation is a big problem for Japan, as it’s accompanied by many negative effects. Deflation discourages spending by consumers, because they postpone making purchases as they expect that prices will continue to fall. Deflation also discourages borrowing by both consumers and firms, for the reason noted above: the real value of debt increases as the price level falls. The result is that consumer and business spending falls, causing aggregate demand to fall. If the economy is already in recession, this will become deeper with falling aggregate demand, unemployment increases further, incomes and prices fall further, deflationary pressures increase further, spending and borrowing decrease further, and so on in a downward spiral.

If there are any winners of this, it’s Japan’s discount retailers, which are thriving. Nitori Holdings Co., a budget furniture store with the ubiquitous catchphrase “More than you paid for” (it’s cooler in Japanese), has grown into one of the country’s top 10 retailers, adding more than three stores a month for years. And Japan’s 100-yen shops, the equivalent of dollar stores, which were mostly unheard of until the late 1990s, now have almost 7,000 outlets pulling in almost $7 billion in annual sales. “There’s no reason,” says one fan, 75-year-old Naoko Ishikawa, “to feel embarrassed about shopping at a 100-yen store anymore.” ―With Edward Gelband

However, there’s now gathering warning for other advanced economies, which are also aging fast and struggling with less-than-stellar growth following the 2008 global financial meltdown. “For countries coming out of the crisis,” Ferrero says, “this may be the moment when pressures stemming from demographics are more likely to emerge.”